Fitch Ratings affirms AA rating for Abu Dhabi, citing emirate’s ability to withstand oil price turbulence

The ratings agency cited the Abu Dhabi's ability to withstand turbulence in energy prices.

The decline in oil prices wiped more than 20 per cent off the value of Abu Dhabi and Dubai equities from the beginning of October to the middle of December. Kamran Jebreili / AP Photo

A top ratings agency has affirmed Abu Dhabi’s investment grade despite the impact of a weaker oil price.

Fitch Ratings followed Standard & Poor’s in affirming AA investment grade for Abu Dhabi.

The ratings agency cited the emirate’s ability to withstand turbulence in energy prices with its growing sovereign foreign assets, prudent cost-cutting measures, declining debt levels of government-related-entities, and contributions from the non-oil economy.

Brent crude stabilised and rebounded in February after months of declines. The commodity traded at US$61.52 per barrel on Friday after falling as low as $48 per barrel at the end of January from a peak of $111 in June.

The decline in oil prices wiped more than 20 per cent off the value of Abu Dhabi and Dubai equities from the beginning of October to the middle of December.

Stocks have since rebounded, with the Abu Dhabi Securities Exchange General Index up 18 per cent since December 16 and the Dubai Financial Market General Index up 26 per cent in the same period.

Last week, Standard & Poor’s said that it kept Abu Dhabi’s AA rating, predicting the emirate’s economy would remain resilient despite the lower oil prices.

Saleem Khokhar, the head of equities at National Bank of Abu Dhabi, said the vote of confidence places much in the way of a needed catalyst for UAE equities to hold steady.

This is after the drastic declines when investors feared that the economy would slow down as a result of lower oil prices, said Mr Khokhar.

“It does show the agencies [S&P and Fitch] believe the Abu Dhabi economy, despite the oil price, has the strength and ability to grow,” Mr Khokhar said. The report “helps the market hold steady and doesn’t come lower, supporting current valuations. The real concern was that the economy tails off and equities suffer”.

In a report released late on Friday, Fitch said sovereign assets were expected to have grown to 184 per cent of GDP by the end of last year. There is more room for “significant cutbacks in aid, net lending to state owned enterprises and transfers to the federal government”, the report said.

The debt of government- related and state-owned enterprises declined to 34.5 per cent of GDP by the end of last year, “reflecting the authorities’ commitment to containing indebtedness”, Fitch said in its report. “Explicit contingent liabilities are clearly delineated and GREs and SOEs borrowing plans are scrutinised by the authorities,” the report added.

Non-oil economic growth, which stood at 7 per cent last year according to Fitch estimates, is expected to slow to 4 per cent next year as a result of cutbacks on spending and a slowdown in Dubai, the agency said.

Fitch, however, voiced concern that “economy policymaking tools, primarily at the federal level, are weak, although steps to develop the policy framework continue”.

“A macro-fiscal unit has been established at the Department of Finance and the use of macro-prudential tools has increased. Nonetheless, Abu Dhabi is primarily dependent on its fiscal and external buffers to absorb shocks,” the report said.

The ratings agency also pointed to “major gaps in the transparency and availability of data remain despite recent improvements.

“In particular, a comprehensive external balance sheet is not published and there is less information on the sovereign balance sheet than peers. Few high-frequency indicators are disseminated, although the publication of quarterly national accounts data has begun,” the report added.

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